Coal: Does This Signal The End of The Mining Boom?

Whether you’re buying shares, property or any other financial asset, it’s a good mental exercise to try to get your head around the motivation of the seller. After all, no-one wants to make a bad deal. Any time you buy a financial asset, you’re expressing a different opinion to that of the person selling it to you. You’re fundamentally saying you think the asset is worth more than the current price, while the seller believes it is worth less. After all, no one in their right mind would pay more than something is worth, and no seller would part with…

Whether you’re buying shares, property or any other financial asset, it’s a good mental exercise to try to get your head around the motivation of the seller. After all, no-one wants to make a bad deal.

Any time you buy a financial asset, you’re expressing a different opinion to that of the person selling it to you. You’re fundamentally saying you think the asset is worth more than the current price, while the seller believes it is worth less.

After all, no one in their right mind would pay more than something is worth, and no seller would part with something for less than the real value. (Yes, buyers and sellers are frequently irrational – but that’s a topic for another day!)

Differences of opinion

It is this very difference of opinion that creates a market.

After all, if we all agreed on valuations, no-one would buy or sell, because I’d never offer you a price that was low enough to make you want to buy, or high enough to make you want to sell.

As an example, I think it’s pretty likely that gold is overvalued at the current price. Seeking to understand why investors and traders were prepared to pay somewhere near US$2,000 per ounce helps me see the other side of the coin. It tests my own thinking, and challenges my assumptions.

In this context, two recent pieces of news from the coal mining industry have piqued my interest.

Still booming

I don’t know that anyone would argue we’re in a resources boom. We can argue about the length of the boom and the size of any bubble, but resources prices are at very high levels, and the level of demand doesn’t appear to be showing any signs of waning.

And yet, two of Australia’s highly regarded businesses have either agreed to sell or are considering selling mining assets.

Wesfarmers Limited(ASX: WES) is one of the few remaining large operating conglomerates in Australia. Despite doubts about the prudence of buying the Coles business in 2007, the mining-to-supermarkets behemoth has a long and successful track record of buying and running businesses that have allowed the company to deliver strong returns to its shareholders.

Washington H. Soul Pattinson & Co. Ltd.(ASX: SOL) started life as a chain of chemists in the 1870s and has evolved into a conservatively run investment house, managed by members of the same family since its listing on the ASX (and the exchange’s forebears) in 1903, and holding assets as diverse as investments in both building products and telecommunications businesses.

Time to sell?

What both of these businesses have in common is that Wesfarmers has recently agreed to sell its Premier coal mine, and Soul Pattinson’s 60%-owned New Hope Corporation(ASX: NHC), a Queensland-based coal miner, has effectively put itself up for sale.

While the jury may still be out on whether Wesfarmers has blotted its copybook by paying too much for Coles, the company has probably earned the benefit of the doubt based on its history – and while Soul Pattinson may be conservatively run, it has an enviable track record that stretches back over a century, and the Millners are some of the sharpest investing minds in the business.

Both of these companies are happy to sell, almost certainly because they are receiving a price they believe is in excess of the value of the asset they are selling. Equally, the buyers (and potential buyers) are offering a price that they believe represents good value.

Foolish take-away

It’s hard to escape the tendency to look at these transactions through the lens of the mining boom. If the management and boards of these two businesses felt the mining boom had a lot further to run and that prices would hold or continue to climb, my sense is they’d be much more reluctant to sell.

Clearly they are being offered prices they believe are too good to refuse. Either they are wrong, or perhaps these transactions may well, in hindsight, come to be seen as good moves.

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